Like a growing number of Colombians these days, Antonio Benevides of Bogota just bought his first car. Rising incomes and affordable terms are causing a surge in car sales in the country and elsewhere in Latin America, where economies are flush with the windfall from the global commodities boom.
But low prices are another factor in the sales surge, and that puts Benevides, a 26-year-old amusement park worker, in the middle of a different, still emerging consumer trend. He bought an inexpensive Chinese import, a brand new Chery QQ compact, for about US$9,000 — or US$3,000 cheaper than the comparable car from French car maker Renault, whose tires he also kicked.
“That difference in price is what put a new car within my reach for the first time,” Benevides said as he drove the car off the dealership lot near Bogota’s El Dorado international airport. “I’ve heard they hold together well, that they are cheap to operate and, as you can see, they are not bad looking.”
Chinese auto manufacturers, which sold about 18 million cars on their home turf in 2011, are increasingly looking to other emerging markets as stepping-stones in their long-term quest for global trade prominence and perhaps winning over U.S. and European motorists in decades to come. For a variety of reasons, Latin America is increasingly a focus of that strategy.
That the region can be a lucrative place to make and sell cars is hardly a proprietary secret of China's. GM South America chief Jaime Ardilla has long touted the Latin American operation of the U.S. automotive giant as the company’s crown jewel in terms of return on investment and growth.
According to AT Kearney consultants, Chinese car makers exported half a million cars worldwide in 2011, and will accelerate to as many as two million by 2015 and three million by 2020. The fastest-growing destination for those exports is Latin America, where overall car unit sales in countries like Brazil, Colombia, Peru and Argentina have grown sharply in recent years. While Chinese models are scarce in North America, some 16 brands including Chery, Foton, Great Wall, Geely and Yangtze are now sold in Colombia, and twice that number in Peru.
“I bought it for economic reasons, as simple as that,” says Jaime Rodriquez, a 42-year-old Bogota-based accountant who purchased a US$13,000 made-in-China Geely – his second car — in November. His primary motive? Having a second license plate to get around Bogota's traffic restrictions, which stipulate the number of days a week that a car can be driven on its roads. “A Mazda with similar features would have cost me US$2,000 more,” Rodriguez says.
Cost savings can be even more dramatic in other countries, such as Brazil where some Chinese models sell for two-thirds the price of a comparable US$20,000 Volkswagen Gol, according to Guido Vildozo, an auto industry expert with IHS Automotive in Massachusetts.
What makes Chinese cars so much cheaper? Partly, it’s relatively low labor costs. Most Chinese auto workers earn between US$300 and US$400 a month, compared with, say, Mexican workers, whose monthly pay is between US$2,000 and US$3,000. U.S. assembly line workers make an average US$5,000 to US$7,000 a month, according to Vildozo.
Jian Sun, a partner with AT Kearney auto consultants in Shanghai, adds that another important cost advantage that the Chinese enjoy is the reverse engineering that they carry out on U.S., European and Japanese cars, which saves them much of the cost of designing new models themselves from scratch.
Whatever the reasons, Colombian consumers are taking to Chinese cars. Oliverio Garcia, president of Andemos, the national car dealer trade association in Bogota, notes that Chinese car makers now have a 5% market share in the price-conscious Colombian market, up from zero five years ago, and are gaining. “All imported cars pay stiff tariffs in Colombia, so vehicles that enter with a very low cost basis are going to have a price advantage,” he states. “The Chinese have a big opportunity here.”
In Peru, Chinese imports have captured 15% of the new unit sales in 2011, up from 12% the previous year, and from virtually zero six years ago, says an executive at Lima-based dealership Plaza Motors.
Why Consumers Are Confident
Observers note several factors in China’s rapid advance. First, the tide of economic growth is rising faster in Latin America than most other markets, pushing up consumption in everything from white goods to tourism to housing. The boom in global sales of Latin America’s iron ore, soy beans, orange juice, coffee, timber and other natural resources and farm products will help the region’s economy grow a projected 4.5% in 2011, according to the United Nations’ Economic Commission on Latin America and the Caribbean (ECLAC). That’s around three times the projected U.S. growth rate. And it’s not a fluke. Prosperity in the region has caused an expansion in its middle class to 30% of the population from 20% a decade ago, adds Augusto de la Torre, the World Bank's chief Latin America economist.
Individual households are reaping the benefits. Colombia’s GNP, or per-capita yearly economic output, has nearly doubled from US$3,400 to US$6,700 in just five years, while inflation has remained a manageable 5% or less most years, says Camilo Perez, an economist with Banco de Bogota. That means households have more disposable income. The upward mobility combined with economic good times are having a psychological impact: Consumers are more confident about their futures, and thus more willing to invest in cars — the second-largest purchase most will make, after their homes.
The availability of credit is another factor. Although some countries, including Brazil and Chile, have tightened credit in recent months to try to control inflation, car loans over the past decade generally have become much more affordable in Latin America. Seven-year car loans at single-digit interest rates are common, making payments more acceptable than a decade ago when loans typically were paid off in two or three years. The improved stability and strength of the region’s financial services industry have made credit more available. Moreover, most countries, with the notable exceptions of Venezuela and Argentina, have tamed the inflation beast that once put a damper on Latin credit markets and made lenders reluctant to extend terms.
The convergence of these factors has contributed to rapid growth of the Latin American car market — and to expectations that the boom will continue. Colombian car sales in 2010, for example, jumped 25% last year from the previous year to about 300,000 new light vehicles sold and could grow by another 25% in 2011. AT Kearney’s Dallas-based Americas partner Brian Irwin projects a highly robust average 11% annual growth rate in Colombian unit sales through 2023. Sales in Brazil, which were around three million units in 2010, should continue growing by around 6% over the next decade.
Emerging Market Training Ground
Because annual auto sales growth in mature markets, such as the U.S. and Europe, are trending at no more than 2%, it’s easy to see why Latin America is so attractive to Chinese manufacturers. But there are other factors, comments AT Kearney’s Sun, including the important consideration that the Chinese companies are not prepared — yet — to tackle the U.S. and European markets, which are more competitive and demanding in terms of quality and emissions standards. Conversely, the competitive and regulatory bars are lower in emerging markets, he says, and provide a training ground for the future.
“For Chinese [original equipment manufacturers], it’s much more feasible to attack emerging markets such as Brazil and Colombia, where they share similar road conditions, emission and safety standards, and market parameters," notes Sun. "Latin America, Africa, Southeast Asia and Eastern Europe all make more sense for them as markets, whereas entering developed markets and getting new models certified for sale is a very challenging process.”
Bernard Swiecki, an industry analyst at the University of Michigan’s Center for Automotive Research, agrees. Before the financial crisis hit in 2008, some Chinese car makers were talking of ambitious plans to enter the U.S. market, but then had to backtrack. (In unit sales, China has overtaken the U.S. market, which is expected to log 12 million this year.)
He recalls Chery announcing plans to build a car plant in Nebraska, and forecasts of getting a 5% to 10% market share in the U.S. "Everyone knew it was crazy. In the end, it never built the plant or introduced a U.S. product, but tried in Europe with a BMW-competitor model, which was woefully inadequate,” Swiecki says. “On top of the realization that their products weren’t there yet, the financial crisis hit. So there was little reason to be bullish about penetrating here.”
The upshot was a reappraisal by Chery and several other companies of how and where to attack foreign markets. Some decided to use Australia as a kind of test market. “By refining parts distribution and their marketing strategies there, they are working out the kinks and prepping for entering U.S. and European markets once they have it honed,” Swiecki says.
Others jumped with both feet into Latin America. According to analysts, the high influx of Chinese car brands into Latin America — “I’ve lost count how many. I can’t keep track,” says AT Kearney’s Sun — is part of a winnowing out among manufacturers. Many Chinese manufacturers view overseas expansion as a survival tactic in their notoriously cutthroat domestic market, which requires scale to support growth. Unlike the U.S. and Europe where 100 years of consolidation has reduced major manufacturers to about a dozen, scores of Chinese automotive companies, many of them owned by regional or city governments, are still undergoing a process of natural selection.
Building Plants, and Loyalty?
High import tariffs are also persuading Chinese companies to build Latin American auto factories to avoid paying the duties and be closer to the end consumer. In October, Chinese manufacturer JAC announced a venture with its Brazilian partner to build a US$500 million factory in northeastern Bahia state, with production slated to begin in 2014. Earlier, Chery announced it would build a factory 100 miles north of Sao Paulo to open by the end of 2013, to add to a plant that it already has in Uruguay. Meanwhile, Great Wall is building an assembly plant in Venezuela, another high tariff country.
Chinese investment in car factories is only one facet of the country’s escalating investment in Latin America. According to the UN’s ECLAC, Chinese direct investment in the region was US$22.7 billion in 2011, up 49% in 2010. (More than 90% of that money is going to mining and other natural resources, with the remainder to manufacturing and other kinds of facilities.)
Along with Chile and Peru, IHS’s Vildozo cites Colombia as the countries with the continent’s brightest growth prospects. “Colombian GNP will probably cross US$10,000 per capita in three years, and that will be a real milestone,” Vildozo says. “That’s when we’ll see the market take off.”
Colombia is home to three car assembly plants — owned by GM, Mazda and Renault — where cars are put together from imported components. But there are no fully integrated auto factories in the country. That could change by 2015, says Vildozo, if Colombian unit sales reach the 500,000 a year. “At that point, Colombia’s installed capacity won’t be enough to meet demand.”
Will a Chinese auto maker build Colombia’s first major auto plant? That could depend on Colombians’ acceptance of Chinese brands in coming years — that is, whether the cars earn customer loyalty and confidence over time, and sales continue to grow. For now, some buyers are resisting the siren call of low prices to stick with more-established brands.
“I nearly bought a Chery QQ, but in the end I went for a used Renault sedan,” says a Bogota resident. “Renault has been selling cars here for decades, and I know that when it comes time to sell or trade in, I’ll find a buyer. Who knows if that would be the case with a Chinese car, whether they can stand Colombian roads, whether they won’t fall apart in four or five years? A low price is one thing; knowing a car will have a future value is another.”